Microsoft recently announced that over 8 million Kinect sensors were sold within 60 days of its launch in November 2010 making 2010 the biggest year in XBox history. [1] Microsoft sold around 1.9 million XBox 360 consoles in December 2010 alone, according to NPD, a market research company. [2] Microsoft, which competes with Nintendo and Sony in the video gaming console market, is expected to continue its strong sales in 2011.

However, in the medium term the Kinect could help reshape the Xbox living room experience from a gaming focused one to more general entertainment such as watching movies, online TV and interacting with friends. We have a $31.56 Trefis price estimate for Microsoft stock, which is about 12% above the current market price.

Kinect motion technology allows gamers to play by simply moving their bodies with no need for a physical controller. As mentioned above, better than expected Kinect sales would not have much impact, as XBox constitutes less than 3% of our estimate for Microsoft stock. Microsoft is expected to grow its market share of the gaming console market courtesy of Kinect. We expect its market share to increase from around 12% in 2009 to 17% in 2010, followed by a slower market share gain in the future.

However, Microsoft is planning to leverage Kinect technology for the living room beyond gaming. Microsoft announced that Xbox LIVE Gold subscribers will be able to use Kinect to control Netflix on Xbox. [1] This means that viewers will be able to pause, rewind, and fast-forward streaming movies with only their voice or gestures. The company also announced that Hulu Plus will be coming to Xbox LIVE as a Kinect-enabled experience through which viewers will be able to watch TV shows.

This would reduce the need for controllers and keyboards in the living room and create a much nice user experience. In the future, Microsoft could also license Kinect software to TVs and cable set-top box makers just like Google embeds its Android software in TVs to come out with Google TV. In this way, Kinect can help speed up the migration of Internet to the TV set.

The Avatar Kinect uses cameras and motion sensor technology to allow users to bring avatars to life and interact with friends in virtual environments. The company revealed this at the Consumer Electronics Show in Las Vegas as a potential way to expand the social experience using Kinect.

If Microsoft further explores these enhanced uses of Kinect technology, it could lead to new revenue opportunities for Microsoft as well as higher sales of the Kinect and Xbox.